Acme Corporation is in the business of manufacturing various electronic items. It is a public company that files financial statements with the SEC. Acme uses standard costing for inventory using FIFO. The year is turning out to be a hard year, full of surprises.

Bob Wolfe is the business leader of the business unit that manufactures and sells video display units for the US market. Bob has just called you complaining that his accountants are killing him by requiring the recording of expenses in the quarter (second quarter of the year) that he does not think should be recorded. There has been friction between Bob and his accountants previously, but the amounts were always small. This time, the amounts are material to the business and likely material to the company as a whole. The numbers involved are big enough that if they are not recorded properly, investors in the company may come to a wrong conclusion as to the financial health of the companys business.

There are two issue which are getting Bob worked up. A competitor is dumping competitive product in the US market. Bob knows the competitor well and knows they made some very bad investments in new businesses and are facing a cash crunch. They are being forced to sell all of their inventory at below cost to raise cash so they can made a debt payment at the end of the quarter. At this point, Bob believes the competitor is not thinking about profits, but only cash. If they miss the debt payment, they may have to file for bankruptcy.

The first issue Bob is complaining about is that his accountants want to write-down his finished goods to the lower of cost or market with current market prices significantly depressed due to the competitors dumping of product.

You contact Bobs accountants and they confirm all that Bob has stated. The accountants state they are following normal policy. Each quarter they gather market prices for each major product, usually from sales records of Acme products and published offering prices of competitors. For this quarter they noted the price of the competitors products have fallen significantly and the prices of Acmes products have also been reduced to maintain some semblance of market share. The accountants use a spreadsheet where they input the data and it computes the lower of Acmes cost of net realizeable value for all products. This is resulting in a large inventory write-down in the second quarter.

You talk with the accountants, the marketing managers in the business and Bob, and all seem to hope that prices will recover after the competitor raises enough cash to make their debt payment. Bob emphasizes that long term, the competitor cannot keep his prices this low as there is no profit for anyone with those prices. His accountants agree, but believe the answer from their spreadsheet means they have to record the write-down. You check some news reports about the state of the market and specifically the competitors actions. These external sources confirm what Bob is saying and forecast prices to fully recover later in the year.

Bob is intent on not having any write-down in the second quarter. His accountants acknowledge his views, but want to be conservative and believe that the better approach is to write down the inventory now and reverse the write-down later in the year if prices do recover.

The second item of contention is volume variances. Given the big reduction in pricing, Acme reduced its prices, but not enough to fully keep their market share. They decided to pull back on volume in the second quarter until the prices recover. This is generating negative volume variances. Bob believes this is all related to the actions of the competitors and the variances should not be expensed, but deferred on the balance sheet as deferred costs. Once the prices improve, Bob expects to spread these deferred costs back into cost of sales over the third and fourth quarter when there is more profit to absorb the costs. Bobs accountants take the position there is no valid reason to defer these variances and they should be recorded in the second quarter.

What are the two accounting issues, citing FASB?